Why is fundamental analysis critical in Hong Kong?
Fundamental analysis refers to determining the intrinsic value of security, such as shares. Investors and analysts use the concept to analyze company data such as financial statements, economic events and industry changes to assess whether its current price reflects its true worth.
Why practice fundamental analysis?
In Hong Kong, fundamental analysis is practised for two reasons:
Lack of valuation
It deems it necessary because the Hong Kong stock market has been affected mainly by speculative investors who observe price movements only. The lack of emphasis on valuation often leads to dangerous excesses during market bubbles and waves of panic selling, otherwise known as “bear raids”. Therefore, making fundamental analysis an essential tool for those assessing long term investment potentials rather than short-term profits.
Efficient capital markets
Hong Kong has one of Asia’s most active and efficient capital markets, making it a prime destination for foreign investors to trade. However, speculators continue to wreak havoc on small businesses due to the lack of protection against malicious short-selling practices. Therefore, fundamental analysis is necessary for those wishing to protect their investments from such risks.
How does Fundamental analysis work?
In Hong Kong, as in other places around the world, investors often face a wide range of choices regarding investing. In addition to picking from among thousands of listed companies on their local exchanges, they can choose from investment products that may be traded overseas. With so much choice available, including opportunities provided by new ways of trading securities via social media or mobile phone apps, how can one decide what investment vehicle is best for them?
A fundamental analyst will look at some basic metrics about a company (or fund). It includes factors such as:
- Its earnings and revenue growth over time;
- Whether the company has sufficient cash flow to pay its short-term debts; whether management’s strategy indicates that it is likely to remain profitable;
- Whether it can increase its market share and its pricing power.
Those who take the time to understand a company’s fundamentals may make better investment choices and maximize their returns. But investors need not invest in Hong Kong shares only; they may choose stocks traded elsewhere that look attractive from a fundamental perspective or buy mutual funds based on specific global indices derived from such analysis.
This type of fund is referred to as “fundamental index” (or Findex) funds because it looks for companies with solid fundamentals (and excludes those without). It typically does not use leverage, i.e., borrowing money to boost potential returns; instead, it invests directly in high-quality stocks included in an underlying benchmark like the MSCI World Index or the MSCI Hong Kong Index. By doing so, investors can observe the behaviour of high-quality companies worldwide and pass on low-quality ones.
In some ways, a global growth fund with a heavy weighting of Hong Kong-listed companies is one way to invest in the region’s economy and its future while also participating in the returns that global equity markets have generated over time.
Fundamental analysis is essential because its emphasis on valuation provides better insight into long-term investment potentials than short-term market movements. It also gives securities analysts and security holders more power over malicious speculators who aim only at making profits through price fluctuations and bear raids.
Investing in Hong Kong stocks represents a winning strategy for investors seeking exposure to China’s economy and other growing markets while also receiving solid returns from globally-diversified equities.
If you’re investing in an index fund that is tracking a global index, we recommend choosing one with some exposure to Hong Kong stocks, perhaps even by weighing it higher than other markets. Contact a reputable online broker at Saxo capital markets for the best advice on stock markets and fundamental analysis. Start trading on a demo account before investing any of your own money.